Lower taxes, simpler laws

HEAVY payroll taxes, complicated laws, bureaucratic burdens and challenges for launching new businesses: this is how the Economy Ministry has diagnosed the ills of the Slovak business environment.

HEAVY payroll taxes, complicated laws, bureaucratic burdens and challenges for launching new businesses: this is how the Economy Ministry has diagnosed the ills of the Slovak business environment.

The ministry's report, approved by cabinet on January 24, prescribes simplifying employment-related regulations, cutting the costs of labour, and introducing state aid for starting businesses.

The business community and observers agree with the ministry's diagnosis, but they are more skeptical of the state's determination to follow through with the proposed reforms. They also say that less state regulation of the market might do more to help the business environment.

The Economy Ministry said that the business environment has been steadily improving. Significant changes to the tax system, labour policies and bankruptcy legislation have been followed by important milestones, like the new public procurement law and higher tax deductions for the self-employed, the ministry's official document reads.

The report lists the recent revision to the Labour Code as the most significant piece of legislation in 2007. According to the document, the code's changes bring more security to employees.

"However, negatives still persist," reads the report. "A heavy payroll tax burden has been seen as one of the most serious obstacles to doing business in Slovakia. The negative perception of payroll tax rates has far exceeded other perceived problems, such as the low enforceability of the law, the administrative burden of running businesses, frequent changes to the laws and complicated legislation."

The ministry proposes gradually easing payroll taxes by reducing the insurance premiums that employees transfer to funds. However, the report is quick to add that the move could only be possible after any negative impacts on the stability of the social insurance system are eliminated. The Economy Ministry also proposes loans for start-up businesses, which would be delivered by boosting the programmes of the state-run National Agency for the Development of Small and Medium-sized Businesses. Start-up businesses should also receive some help in getting space in industrial parks and business incubators, said the ministry.

Business leaders agreed with the problem areas that the ministry listed. Robert Kičina, president of the Slovak Business Alliance (PAS), said the barriers defined by the ministry have been topping the surveys that PAS conducts among the business community.

"However, I would really add to that the education system, which has been continuously falling behind," Kičina told The Slovak Spectator. "There is a huge disparity between education and the labour market, with schools producing graduates that are poorly prepared for the workplace."

Richard Ďurana, director of the Institute of Economic and Social Studies, said other serious problems are the extensive efforts to regulate trade relations and investment stimuli, and high public expenses that distort natural trade relations.

Ďurana also commends the ministry's effort.

"However, the solutions they offer could hardly cure the problems," he told The Slovak Spectator.

In particular, he and Kičina doubt that the proposed changes would help more than a selected group of businesses.

"Support provided to a particular circle of businessmen will hardly improve the business environment," Kičina said. "On the contrary, it causes its decline, because such steps discriminate against other participants in the market who are not eligible for the support, although they still contribute to this support through their taxes."

The report also says that new businesses should get access to special consulting services provided by the state. But it would be much cheaper to simplify the legislation and remove the superfluous regulations, Ďurana said.

"If the state wants to support businesses, it should simplify the administrative requirements for everyone," Kičina told The Slovak Spectator. "It would make it possible for all businesses to compete in an environment free of distortions where those who are the most effective at producing goods and services will be successful, as opposed to those who continuously compensate for their ineffectiveness by using state support."

If the government wants to support something, he added, it should be electronic government services, fighting against corruption, improving the enforceability of the law, and simplifying the registration of patents.

Ďurana said that lower payroll taxes would be a good alternative to the ministry's proposals, because they inflate the cost of labour and remove the administrative barriers to doing business. It would also improve employment in the poorer regions of Slovakia, he added.

The business sector would also appreciate a more flexible Labour Code. The World Bank called the new legislation, which came into effect September 1, 2007, a step back that weakened the flexibility of the labour market and increased costs.

In its report, the Economy Ministry said the law-making process needs to improve so that it can create simpler, more readable and clearer laws. The option of passing laws in a shortened legislative proceeding should only be used for special or emergency cases, the report said.

"I am pretty sure that if the legislative procedural rules in place today were followed, and if serious feasibility studies are conducted when the laws are drafted, legislation would more stable and of higher quality," Kičina said.

But it's hard to tell if the ministries have enough well-qualified people who are able to prepare feasibility studies, he added.

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